Once a cartel establishes its profit-maximizing price:
A) Entry into the industry of new competitors will not affect the cartel's profits
B) Output changes by cartel members have no effect on the market price
C) Each cartel member is tempted to cheat on the cartel price in order to add to its profit
D) All cartel members have a strong incentive to adhere to the agreed-upon price

Question

Quizplus · Accepted Answer

Once a cartel establishes its profit-maximizing price, each cartel member is tempted to cheat on the cartel price in order to add to its profit. This is because each member would gain more market share and revenue by lowering its price slightly below the cartel price. However, if all members do this, the price will fall below the profit-maximizing level for the cartel as a whole. Therefore, maintaining the cartel price requires some sort of mechanism (such as monitoring or punishment) to deter cheating.

Once a Cartel Establishes Its Profit-Maximizing Price